Mostly, commercial leases provide an option to the tenant to renew an existing tenancy. This option to renew gives the tenant a right to continue to rent the property after the expiry of the existing tenancy.
However, in absence of such an option to renew, you must negotiate a new lease before the expiration of the tenancy.
What is an ‘Option to Renew’?
Generally, the option to renew clause:
- requires the tenant to give a written notice within a specified period before the expiry of the tenancy. Usually, for a commercial lease, this will be 3-9 months before the tenancy expires.
- states the terms for determining the new rental. For example, whether the new rent will be adjusted based on a fixed rate of the current rent, or whether the new rent will be adjusted by negotiation.
- contains a reference to the terms of the new tenancy such as on the same terms as the existing tenancy agreement.
An example of the option to renew clause is:
“Provided that Lessee is not in default in the performance of this Lease, Lessee may have the right to renew the Lease with a total of one renewal period with each term being 12 months (“Renewal Term”) which may be exercised by giving written notice to Lessor no fewer than sixty (60) days prior to the expiration of the Lease or renewal period.
In case the Lessee wishes to extend the lease, the Lessee is entitled to have the priority to renew, provided the Lessee shall give the Lessor 2 months’ prior written notice. The renewed rental amount shall be renegotiated between the two parties under the same conditions. The Lessee shall have the first priority to renew the current lease if there are other parties interested in the property. The Lessor will advise the Lessee of the terms and conditions under which the property to be leased are and the Lessee shall have three (3) days (72 hours) in which to accept or reject such terms. The Parties shall negotiate and enter into a new agreement based on this Agreement.”
Renewal Notice
Depending on the clause, a tenant may need to serve written notice to their landlord. The written notice should be signed by the tenant and detail their address, full name, and business name. If a tenant fails to exercise the option to renew in the required manner as set out in the clause, then presumably, the tenant has forfeited their right to exercise the option.
Negotiating new lease
If you have forgotten and missed the opportunity to exercise the renewal option, or if the tenancy agreement does not provide an option to renew, the parties may renegotiate the terms of the lease. If you fail to renegotiate a new lease, then you will have to leave the property and restore it to its original handover conditions at your own cost.
When negotiating for a new lease, the concept of “prevailing market rent” may be helpful to determine the rent of the renewed lease. To find out the prevailing market rent of a property, the parties can jointly appoint an independent professional valuation surveyor to do the job, the decision of whom will be final and binding on the parties.
Key Takeaways
- If your tenancy agreement includes an ‘option to renew’ clause, you should exercise it accordingly within the specified period, usually by serving written notice to the landlord.
- In absence of an option to renew, you must negotiate a new lease before the expiration of the tenancy.